Moving towards a cashless society

I was reading an article on Bloomberg which stated that by the end of this month, Scandinavia’s last mint will have closed. Following in the footsteps of Sweden and Norway, Denmark has decided to outsource the production of its coins to Finland. The Danish central bank has already stopped printing banknotes. They’ve become so unfashionable that there’s no rush to find a subcontractor for those. In general, the rule of thumb in Scandinavia is: “If you have to pay in cash, something is wrong.”

From the European Central Bank to India to Venezuela, authorities are falling out of love with cash, particularly the kind of high-denomination banknotes favoured by mobsters and drug dealers.

As the above chart shows, Scandinavia is way ahead of the game. The region is frequently cited as a trailblazer in the global transition to a post-cash society. Sweden was the first European country to implement paper money; now it is the first to eliminate it. Sweden is the place where, if you use too much cash, banks call the police because they think you might be a terrorist or a criminal.

About six months ago, some European economists started to make a case for a cashless society, referring to some Scandinavian countries where the majority of the payments was conducted through non-cash means. Thus, they argued, there was no need to keep on working with cash, as a cashless society seemed to be working just fine. Technically and theoretically, they are right. It is much easier to just swipe a card or just tap with a cell phone to make a payment, but the real issue at hand is that you’d have to have full confidence in the financial system.

Denmark is today one of the countries with the lowest percentage of notes and coins in circulation. As recently as 1991, cash and cheques were responsible for 82 percent of Danish transactions. The cheque went the way of the Dodo in late 1990s, while the use of cash has been dropping steadily ever, even during the current period of negative interest rates.

According to a March report by Denmark’s Tax Ministry, the size of the country’s black economy has fallen by a third between 2012 and 2014, from 45 billion kroner ($6.3 billion) to 31 billion. Although the ministry did not provide a reason for the reduction, it is interesting to note that cash usage also fell during the period.

A June report by the Danish central bank found that the cost of handling cash is more than double that of handling domestic debit card payments. The same report also found that hardly any Danish shop prefers cash to plastic these days. Fear of robbery was often cited as a key reason for their preference. The Danish government is now allowing some shops to refuse cash payments, while the central bank has joined others in exploring virtual currencies based on blockchain-style technologies.

That carries its own set of risks, particularly when it comes to privacy. In 2014, scores of Danish royals and celebrities were shocked to discover that a tabloid had for years paid a rogue consultant at digital payment provider NETS to obtain copies of credit card transactions.

Besides breach of privacy, we are susceptible to other threats like cyberharassment and cyberheist. Communication network needs to be robust enough to complete the transactions. Weak communication may cause partial or failure of transactions to our huge embarrassment. Nevertheless, we will always be under the state control. A tyrant state can expropriate our money in a matter of few minutes. A post-cash society requires trust and an efficient state.

Post-demonetisation of ₹1,000 and ₹500 banknotes, the Indian federal government is pushing hard for transition towards a less-cash society through new digital platforms and incentivising and subsidising digital transactions. Reserve Bank of India has set up a committee in June this year to study the use of blockchain technology to reduce the use of paper currency.

Prior to demonetisation, the bulk of transactions were conducted through cash. Since then, it has reduced considerably and this move has proven to be a catalyst for consumption to be digitally driven and payments to go cashless. It is pleasing to see smaller merchants such as tea stalls, grocery stores as well as consumers in rural and smaller cities embracing digital payments. Conversion from cash to cashless is not just about consumer preferences. It requires the entire ecosystem of suppliers, big and small, in a market to also be ready, willing and able to convert.

The digital transformation of cash is a cost savings to the entire financial ecosystem. From printing to cash management to physical infrastructure to securing and dispensing of currency, cash is very expensive. Government must think out of the box to pass these savings to consumers as incentives to embrace digital transactions.

The India government’s demonetisation decision, replacing 86 percent of currency, was undeniably disruptive. No major disruptive decision comes without upheavals and it has inconvenienced most people, especially those on the wrong side of the socioeconomic and digital divide in India — the poor. The pain to the common man should have been better managed. Digital and physical infrastructure and logistics should have been in place in advance of the November surprise.

How far the bigger and less homogeneous nation like India can go cashless is worth to be seen. Success of the Indian government in pushing the nation to a less-cash nation will not only be a great achievement, but will set an example for the world. The credit also goes to every Indian undergoing hardships due to cash crunch in this transition towards a cashless society.

Cash plays an important role in our modern economy, particularly among the poor, and every step forward towards cashless future should be with great caution, keeping the poor section surviving solely on informal economy included in the transition process.

As we go cashless, we will miss the crisp, the smell, the sound and the feel of a new paper currency!

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28 Thoughts

Neither I’m advocating nor I’m opposing cash -less or Less -cash economy.
But going cashless in India is riddled with it’s own and unique problem. We never had 100% 3G network… Maybe 2.25G! Even today data is inconsistent, poor network coverage, insecure sites and phones pose their own challenges. All of sudden everyone’s advocating cashless system especially banks without prior homework and working. To ensure that everything moves smoothly, it needs time and preparation. No system is fool proof, so the authorities should not over emphasize only benefits of cashless system and stop promoting it as medicine for all ailments.

Yes Arvind, no system is foolproof and cashless transaction is not a panacea. Cash system has stabilised over a period of centuries, cashless system will also need some time to be acceptable everywhere.
Cashless transactions have advantages of cost, time efficiency and transparency. It will reduce the black money and increase the tax base. Most of all, it’s convenient.
As we move towards cashless transactions, we are becoming vulnerable to other threats like breach of privacy, cyberharassment and cyberheist. There should be a scheme similar to deposit insurance in case of eWallets. I repeat a post-cash society requires trust and an efficient state.
Communication network needs to be robust enough to carry out the transactions. Weak communication may cause partial or failure of transactions. USSD-based transaction is a good alternative. UPI is a great solution but it will need a few more months to improve and stabilise.
There needs to be laws regulating eWallets at par with banks and RBI should regulate and monitor cashless transactions as it does for cash transactions.
Any transition is not easy and people by nature resist any transformation or innovation until the process is over. Every transformation needs push. The government is now emphasising it more, maybe to justify the demonetisation decision.

You’re right. Any change is not easy, it’s opposed before its accepted. Of all systems I feel the best option is the one which can be used with feature phone. Smartphones especially android is highly vulnerable.

You’re right. The transactions based on registered mobile number and OTP give you some security. UPI is more secured system than other private mobile payment platforms, but it’s new. It needs to be used for a few months to confirm its robustness. Anyway, we’re entering a new era with its advantages and vulnerabilities.

True…my only thoughts are that whenever authorities want people to switch to new system, they should not project it as the best system. Every method will have its own limitation and advantage, as mentioned by you.

A very insightful post and hope that our system with all its flaws and deficients do support this bold initiative…looks like this is indeed the way forward and all the shortcomings will be addressed and pray that the new year brings in more cheer.
Wishing you and your loved ones the best of the season.

In a sea of “for or against” your post seems quite a balanced opinion. That being said, selling hardship as a virtue is fraught with risk. How about “let us invade China” to stop the flood of cheap goods and boost Indian manufacturing? Or, “let us destroy all buildings to teach corrupt builders a lesson”?

Thanks Ankur ji. You have rightly said: selling hardship as a virtue is fraught with risk. You cannot apply it everywhere as you mentioned stopping flood of cheap goods or destroying buildings of corrupt builders. These would entail huge replacement/substitution cost and time needed, which may run into decades. Demonetization & remonetization are much cheaper and quicker.

As far as India is concerned, I feel the step is right but implementation has been very poor. Just trying to mimic what developed countries have done doesn’t work best…Govt. should have thought through!

Yes, implementation could have been better and coordination between Finance Ministry, RBI and banks was lacking at times. Given the complexities and diversities in India, smooth implementation of this magnitude is really very difficult.

People’s patience is much appreciated. Everyone suffered this transition agony with peace as they believed that it’s for a cause. Now, we need to see the fruits in coming months and also how the government follows through with other needed actions to curb corruptions.

With digitisation of cash transactions taking the driving seat, corruption is now quietly getting relegated to a backseat.

I’m not opposing the move but I doubted from the Day1 whether, in a country like India, such a move will get established with flying colours. A pretty good number of people are still BPL and, they don’t even think of using such cashless methods.

Thanks Maniparna. People accept a change only when there is no other option. We cannot have cashless society in decades, but we can be less dependent on cash. Digitisation of monetary transactions was not the initial motive, but it has gained the importance over the time.

Rightly said – Push for digitisation of payments is a lateral outcome to justify demonetization. Yes, it is difficult in a heterogeneous and segmented country like ours, where the ease with which people can use a digital device varies greatly even within a family, but if successful, it will be the most significant transition for the country. I strongly feel that the process should have been handled better.

Yes Somali, the process should have been handled better. You can see with increase in suppty of currency notes, number of digital transactions is coming down. It’s expected to some percentage, but the large gain in digitalisation should not be erased.